Washington to issue 20-year bonds soon to fund rising deficit

Washington

THE US Treasury will start issuing 20-year bonds in the first half of 2020, expanding its roster of securities as the government seeks ways to fund a ballooning deficit.

Institutional investors have been clamouring for more longer-dated, risk-free securities that offer some nominal yield, amid a global total of US$11 trillion of debt with negative rates. Japanese officials have discussed adding a 50-year security, something the US opted against in its announcement.

"The 20-year bond fits more easily into the existing market structure," said Lou Crandall, chief economist at Wrightson ICAP LLC in New York. "This is a way of taking advantage of long-term interest rates that are low by historical standards without introducing a wild-card such as an ultra-long bond, which would have had more growing pains."

Previously issued 30-year Treasuries with about 20 years left to maturity yield about 2.15 per cent, suggesting the new debt will offer a sizeable premium over other comparable notes. Japanese 20-year bonds yield about 0.31 per cent, and German ones just 0.07 per cent.

The new 20-year bonds will probably draw more domestic buyers than global funds, which tend to favour shorter maturities. Foreign investors bought an average of less than 9 per cent of US 30-year debt sold at auctions in 2019.

More information will come in the Treasury's next quarterly announcement of sales of longer-dated debt on Feb 5, the department said in a statement. Given that the long-standing practice is to avoid a market-timing issuance strategy, the sales will be done "in a regular and predictable manner in benchmark size", the Treasury said.

"The newness of the bond should make it trade a little cheap," said Priya Misra, head of global rates strategy at TD Securities in New York. The yield curve is likely to steepen as the 20-year supply will be coming sooner than some had anticipated, she said.

Ms Misra added that she will be looking to see which securities the Treasury will cut back on to make space for the new 20-year bonds. One danger is that, given the Federal Reserve's efforts to boost purchases of bills, there could be "scarcity" in some maturities, she said.

Longer-maturity Treasuries fell in Asian trading Friday, steepening the yield curve. Thirty-year yields rose three basis points to 2.29 per cent while 10-year yields climbed two basis points to 1.82 per cent. The spread between 30-year bonds and matched maturity interest rate swaps, known as the swap spread, tightened over one basis point.

This is a revival for the 20-year bond, which the Treasury abandoned back in 1986 in favour of the 30-year security, long known as the benchmark "long bond" in the US market before it too was ditched for a time in the 2000s. BLOOMBERG